VENEZUELA WITHHOLDS PAYMENT TO PORTUGUESE COMPANIES

C O N F I D E N T I A L LISBON 000072 NOFORN SIPDIS E.O. 12958: DECL: 02/21/2020 TAGS: ECON EFIN ETRD PGOV PREL ENRG EPET VE PO SUBJECT: VENEZUELA WITHHOLDS PAYMENT TO PORTUGUESE COMPANIES REF: A. 09 LISBON 100 ¶B. 08 LISBON 2629 ¶C. 08 LISBON 1155 ¶D. 08 LISBON 1130 ¶E. 08 LISBON 210 ¶F. 07 LISBON 3193 ¶G. 07 LISBON 2744 Classified By: Poleconoff Lucy Chang for reasons 1.4(b,d) ¶1. (C) Summary: Portugal signed a series of commercial agreements with Venezuela in 2008 to expand economic cooperation. While the agreements have increased Portuguese investment in Venezuela, Portuguese companies have confronted numerous challenges, including devaluation of the bolivar, delays in payment, and difficulties in repatriating capital to Portugal. These obstacles are not likely to change significantly the GOP's soft stance toward Venezuela or its desire to strengthen economic ties; however, they will likely slow the pace of investment as Portuguese companies reassess the investment climate of the Chavez regime and take greater measures to protect their interests. End Summary. CLOSER ECONOMIC COOPERATION -------------- ¶2. (U) In May 2008, during an official visit of Portuguese PM Jose Socrates to Venezuela (refs C, D),Portugal signed an agreement with Venezuela to increase economic cooperation, particularly on oil trade. According to MFA Deputy General for Technical and Economic Affairs Rui Monteiro, the agreement is a complement to a 1994 agreement and a "chapeau" for agreements in various industry sectors ranging from energy to tourism to agriculture, but is primarily a vehicle for Venezuela to trade oil and related products to Portugal in exchange for Portuguese goods and services. The agreement also established a joint commission, co-led by Portuguese MFA State Secretary for Trade Fernando Serrasqueiro and his Venezuelan counterpart, to review implementation of the agreement and potential problems. To date, the commission has met three times in Lisbon and Caracas, most recently in January. ¶3. (U) Since the signing of the agreement, major Portuguese companies, including national airline TAP, construction firm Teixeira Duarte, and the Pestana Group (Portugal's largest hotel and tourism group),reported a significant increase in business. TAP, which operates five direct flights per week between Lisbon and Caracas, estimated 44 million euros per year in business in the Venezuelan market, while Teixeira Duarte's construction operations in Venezuela yielded 9 million euros in 2008, a 0.7 percent increase over the previous year. The company anticipates even greater revenues in 2010 with contracts for the construction of a dam and expansion of a port in Venezuela. ¶4. (SBU) MFA's Monteiro estimated that in 2008 imports from Venezuela to Portugal, primarily oil, totaled 140 million euros, while exports to Venezuela totaled 52 million euros. During the first half of 2009, imports from Venezuela amounted to 52 million euros while exports, primarily canned food, to Venezuela totaled 32 million euros. Monteiro, who was recently posted in Venezuela for five years, observed that when he first arrived in 2003, there were only two major Portuguese companies operating there. Teixeira Duarte has been in Venezuela for more than 30 years and has an interest in large infrastructure projects. The Pestana Group, which opened a five-star hotel in Caracas in 2008, seeks to expand its hotel renovation business. Portuguese Economy Minister Jose Vieira da Silva, who led a trade mission to Venezuela in January, expressed optimism over the future of the bilateral commercial relationship. He announced that exports to Venezuela have increased five-fold since the signing of the commercial agreements and that Portugal seeks to continue to increase exports to Venezuela in 2010. VENEZUELAN CURRENCY CONTROLS -------------- ¶5. (SBU) Despite da Silva's optimism, the commercial relationship between Portugal and Venezuela has not been easy. In September 2009, Finance Minister Teixeira dos Santos (then also serving as Minister of Economy) visited Caracas to negotiate with the GOV for an estimated 89 million euros that had not been paid to Portuguese companies. In recent months, Portuguese companies doing business in Venezuela have been grappling with the devaluation of the bolivar, in addition to ongoing Venezuelan government restrictions on repatriation of capital. ¶6. (SBU) On January 8, the bolivar was devalued for the first time since 2005, by at least 17 percent. Venezuelan President Chavez announced that the currency will be devalued from 2.15 to the U.S. dollar to 2.60 for "priority" imports, and to 4.30 (a 50-percent devaluation) for "non-essential" items. Under this two-tier system, food and health care imports will be able to take advantage of the lower of the two fixed exchange rates, while cars, chemicals, and electronics will be charged at the higher rate. Chavez, who was under pressure to devalue the currency to boost revenue from oil exports, stated that the two official rates would have the effect of "limiting imports that are not strictly necessary and stimulating export policy." While the devaluation has been a boost to the tourism industry, making Venezuela a more attractive tourist destination for foreigners, it has exacerbated difficulties for Luso-Venezuelan importers in Venezuela. With Portuguese imports now relatively more expensive than locally manufactured Venezuelan goods, the devaluation has induced import substitution and undermined free trade. ¶7. (SBU) TAP acknowledged that there has been some delay in payment, exacerbated by the January 8 devaluation of the bolivar, and is reevaluating its service to and from Caracas in anticipation of possible decreased demand in Venezuela for TAP flights. The Portuguese Agency for Investment and Foreign Trade (AICEP) reported that Luso-Venezuelan importers based in Venezuela have experienced difficulties in obtaining foreign currency in Venezuela where repatriation of capital is subject to authorization from the Central Bank and where hard foreign currency has been in short supply. ¶8. (C) Portuguese MFA Venezuela Desk Officer Carlos Ferreira confirmed that Portuguese companies, like all companies in Venezuela, must receive authorization from the Venezuelan government to obtain foreign currency, which he described as a very cumbersome bureaucratic process. He cited this administrative burden as a major reason for Venezuela's delay in payment. According to Ferreira, the Chavez government, as a matter of fiscal policy, restricts the repatriation of capital. He speculated that with the decrease in the spread between the official and black market exchange rates, Venezuela may relax its restrictions and make it easier for investors. (As of January 2010, the black market rate was 6.25 bolivars to the dollar.) Ferreira described Portugal's relationship with Venezuela as generally good, but acknowledged that Portugal is concerned about recent developments. He stressed, however, that Venezuelan restrictions on repatriation of capital have affected all investors, not just the Portuguese. ¶9. (C) Monteiro acknowledged that the MFA has received complaints from Portuguese business owners, including complaints over the difficulty of importing raw materials into Venezuela, but, like Ferreira, underscored that "everything in Venezuela is very bureaucratic." He characterized the delay in payment as more bureaucratic than political, and universal, affecting other countries as well. He estimated that there are 600,000 Portuguese in Venezuela, most of them dual nationals who initially operated businesses in traditional sectors, such as food distribution, public works, and hospital equipment distribution, and subsequently expanded into less traditional markets. Since the 1990s, Portuguese companies have signed agreements with Venezuela in areas such as pharmaceuticals and shipping, supplying medicine to hospitals and maintaining vessels for the Venezuelan off-shore oil industry. Monteiro said 85 percent of the Portuguese in Venezuela emigrated from the Portuguese island of Madeira in the 1950s and 1960s when the island was among Portugal's poorest regions. COMMENT -------------- ¶10. (C/NF) Portugal has been soft on the Chavez regime because of its desire to do business with the oil-rich country and because of the large Portuguese community in Caracas. In recent years, Portugal has courted Chavez as part of the GOP's economic diplomacy, forging stronger ties with economic cooperation agreements and frequent high-level visits. GOP contacts have publicly praised ties with Venezuela, but have privately criticized Chavez's unpredictability, citing high turnover of government officials and tight fiscal control as impediments to investment. The MFA acknowledged that Portugal will proceed "very slowly" in the wake of recent developments. While the Venezuelan government's payment delay is not likely to deter Portugal's commercial interest in Venezuela or change its stance toward the Chavez government, it will likely slow investment as Portuguese companies think twice before investing in Venezuela's potentially lucrative but bureaucratically and politically difficult market. For more reporting from Embassy Lisbon and information about Portugal, please see our Intelink site: http://www.intelink.sgov.gov/wiki/portal:port ugal BALLARD